FOMC Statement Instant Reaction: Overseas Albatross Around the US Economy's Neck

Earlier today, we noted that any traders expecting a meaningful change in monetary policy from the Fed was probably barking up the wrong tree. This morning’s note forecast that, “the Fed’s statement should reiterate that the central bank can ‘be patient in beginning to normalize the stance of monetary policy’ as the central banks punts the tough decision on whether to change its guidance to the March meeting, when it can be more fully explained by a press conference with Fed Chair Yellen.” While this was not a particularly bold prediction, sometimes the middle-of-the-road path is the best, both in trading and monetary policy as today’s Fed decision shows.

The central bank made only minimal changes to its monetary policy statement. At the margin, the Fed upgraded its assessment of the economy and labor market slightly, classifying economic growth as “solid” and job gains as “strong.” On the other hand, the statement was downbeat on inflation, stating that it expected price pressures to decline further in the near term before returning back toward the Fed’s 2% target in the medium term. In acknowledgement of the worsening conditions overseas, the Fed did mention that it would take into account “international developments” when deciding its policy; traders should watch to see if the international slowdown will start to act as a proverbial albatross on the neck of the US economy. Finally, the central bank left in last month’s comment that it could be “patient” in starting to raise rates, suggesting that there will almost certainly be no rate hike at its next meeting in March.

In sum, the statement was merely updated to reflect the latest economic developments; March’s meeting, which features a press conference from Fed Chair Janet Yellen and the Summary of Economic Projections (“dot chart”), is likely to provide more clarity about the future path of monetary policy.

Market Reaction

The market reaction has been extremely limited in the wake of the functionally-unchanged statement. US equities immediately spiked in the wake of the release, but they have since receded and are trading near the middle of the day’s range. The dollar similarly spiked and pulled back to its pre-FOMC level. The most interesting moves have been in interest rates, where the 10-year US Treasury yield has dropped back down to near-term support at 1.75% and in oil, with WTI pressing its 6-year low near 44.00. In other words, the today’s Fed statement has done nothing to change the dominant market themes heading into the meeting, so trend-following strategies remain en vogue.